Budget 2016: NRIs without PAN not to be subjected to higher rate of TDS

Finance Minister Arun Jaitley in his Budget 2016 speech said that Non-resident Indians (NRIs) without PAN will not be subjected to higher rate of TDS. "Non-residents without PAN are currently subjected to a higher rate of TDS. Budget 2016 proposes to amend section 206AA of the Income-tax Act so as to provide that TDS shall not be deducted at a higher rate in case of non-residents not having PAN, subject to prescribed condition," said FM Arun Jaitley.

"It is proposed to amend the relevant provision to provide that on furnishing of alternative documents, the higher rate will not apply," the Budget says.

FM Jaitley in his Budget speech outlined the nine pillars on the basis of which he hopes to enhance India's economic growth. From focus on agriculture to tax and financial sector reforms, here are the nine pillars that Jaitley spoke of to transform India:

1) Agriculture and farmer welfare with an aim to double farmers' income in the next five years

2) Rural sector

3) Social sector including healthcare

4) Educational skills and job creation to make India a knowledge based and productive economy

5) Infrastructure investment to enhance quality of life

6) Financial sector reforms

7) Governance reforms and ease of doing business

8) Prudent management of government finances

9) Tax reforms to reduce compliance burden

Jaitley said that Indian economy is resilient amidst the current global economic turmoil. "Global economy is in a serious crisis. Financial markets have been battered but Indian economy has held its ground firmly."

"IMF has hailed India as a bright spot. Let us look at our achievements compared to the last three years of the last government. We inherited an economy with low growth and high inflation," Jaitley said.

"We have bridged the trust deficit created by the previous government," Jaitley added.

There is no requirement to pay taxes or file a tax return in India if your total income earned or received in India is below the threshold for taxability

I went to England to pursue a one-year course in September 2014. I visited India for 10 days during my studies. I have been employed by a multinational company and have been posted in Dubai since October 2015. My first salary, in dirhams, has been deposited directly by my employer in a bank in Dubai. This financial year I have been in India for six days. Will I qualify as a non-resident Indian (NRI) for taxation this financial year? Am I legally bound to open a non-resident external (NRE) account in India and just declare my salary in my income tax return? If I open an NRE account and my money is transferred to India, will I be liable to pay income tax on the amount earned in Dubai?

—A. Mittal

Based on the information provided, that you have been in India for six days and that your stay in India will be for less than 182 days for the period from 1 April 2015 to 31 March 2016, you will most likely qualify as an NRI. The income earned and received in Dubai would not be taxable in India. Further, India has a double taxation avoidance agreement with the UAE. In case of double taxation, relevant provisions of the agreement may be explored. There is no requirement to pay taxes or file a tax return in India if your total income earned or received in India is below the threshold for taxability, i.e. Rs.2.5 lakh for FY16.

You are not legally bound to open an NRE account in India and transfer your income received in Dubai to that account. If you transfer any money to your NRE account in India after it is received in a bank account in Dubai, it will not be taxable in India as the first receipt of income is outside India.

I have been working abroad but have resigned and would like to return to India. Would my retirement money (which is a lump sum amount) be taxed since 2001 if I file my tax return as a resident Indian in 2015-16?

—Kanu Singh

In case you qualify as a resident and ordinarily resident on the basis of the number of days spent in India during the period from 1 April 2015 to 31 March 2016 and earlier years, your global income will be taxable in India. In such a case, the lump sum amount of the retirement benefit received outside India may be taxable in India. However, applicable benefits under the relevant tax treaty may be explored. If you qualify as an NRI, only the income earned or received in India will be taxable in India.

The taxability of lump sum amount of the retirement benefit earned or received abroad would be case specific and would depend on the individual’s facts.

As a non-resident, you will be taxed only on income earned and received in India. Income earned and received outside India will not be taxable in India.

I invested in the initial public offering (IPO) of an Indian company through my non-resident external (NRE) account last year. The stocks are at a good price right now and I would like to book profits. What will be the tax implications earned on the interest earned? I am a non-resident Indian (NRI) living in the UK.

—Samir Gathe

Equity shares of an Indian company that is listed on a recognized stock exchange in India are considered as long-term capital assets if held for more than 12 months. However, if they are held for shorter duration, they will qualify as short-term capital assets.

Long-term capital gains on sale of listed equity shares are exempt from tax in India. Short-term capital gains on the same are taxable at flat 15% plus surcharge and cess. That is at a maximum marginal rate of 17.304%.

How does India’s double tax avoidance agreement (DTAA) with Australia—where I have been working for the past two years—affect my income here and the Indian salary I receive back home?

—Sundar N.

Since you have been working in Australia for the past two years, for financial year 2015-16, you will most likely qualify as non-resident in India under the India Income-tax Act, 1961. This is because of the following reasons:

a) Your stay in India during financial year 2015-16 will be less than 182 days; and

b) You have gone abroad for employment.

As a non-resident, you will be taxed only on income earned and received in India. Income earned and received outside India will not be taxable in India. Thus, your salary income received in Australia is not taxable in India. However, salary income received in India will be taxable in India.

You may claim benefit under DTAA between Australia and India depending upon your residential status in both these countries under the Agreement. It is likely that you will qualify as a resident of Australia.

In such a case, you may claim the salary received in India for the period that you have been working in Australia as exempt from tax in India. However, to be able to claim such a tax exemption in India, you will need to get a tax residency certificate from Australia.

You may file an income tax return in India to claim the salary income received in India as exempt from tax and for refund of any taxes that you may have already deposited on this salary.

So, if an NRI gets paid a bonus paid in India it will be consider as income received in India, which is taxable under the domestic tax rules

I want to buy a house in India using funds in my non-resident ordinary (NRO) account. What would be the tax implications of this transaction?

—Harish Nambiar

There is no tax liability on purchase of a house property in India by a non-resident Indian (NRI). There will be registration charges and stamp duty to be paid, which will depend on the location of the property in India.

However, there will be tax implications on any income received from the property and on its sale.

In case the property is let out, the rental income, after a flat deduction of 30%, will be taxable in India.

Municipal taxes paid will also be considered for deduction from the rental income.

Sale of property will be taxable in the year of sale. If the property is held for a period of more than 36 months, it will be classified as a long-term capital asset.

Otherwise, it will be considered a short-term capital asset. Capital gains on sale of a long-term capital asset is subject to a tax rate of 23.072% (including surcharge and education cess). However, capital gains on sale of a short-term capital asset is subject to tax as per the applicable slab rates.

I was transferred to a company in the UK about four years ago, and I get my salary in British pounds. I received a bonus amount this year in India. How will this be taxed?

—Gopinath Shinde

As you have been working in the UK and have been physically out of India, it is likely that as per Indian income tax laws you would qualify as an NRI. A non-resident is taxable in India only on income earned in India and income received in India. Hence, the bonus paid to you in India being income received in India is taxable under the domestic tax rules.

However, if you qualify as a tax resident of the UK, under the UK-India double tax avoidance agreement (DTAA), income attributable to employment exercised in the UK will be taxable only in the UK.

Therefore, if the bonus received in India is attributable to the period of employment exercised in the UK, you can claim a refund of taxes withheld in India by the Indian employer by opting to be taxed as per DTAA when filing your Indian tax return. You will need to obtain a tax residency certificate from the inland revenue department in the UK to evidence your UK tax residency.

However, the position would be different if you qualify as a tax resident of India.

Any income, the source of which is located in India, is taxable in India

I am going to Singapore for a 6-month scholarship programme. I will also be working with the university there, for which I will get paid. My company in India will continue to pay me. Will I have to pay taxes for both the incomes?

—Pratyaksh K.

Taxability in India depends on two factors: source of income and residential status.

Any income, the source of which is located in India, is taxable in India (irrespective of residential status). Residential status is determined on the basis of physical presence of an individual in India during a financial year (FY). An individual with residential status of Resident and Ordinarily Resident is taxed on her global income and is required to report her global assets in her India tax return. But a Non-Resident or Resident but Not Ordinarily Resident is liable to pay tax only on India source income.

For FY17, you will most likely qualify as Resident and Ordinarily Resident in India. Income received in India and Singapore will be taxable in India. Income received in Singapore may also be taxable in Singapore. As a tax resident of India, you may claim foreign tax credit on doubly taxed income on the basis of the Double Tax Avoidance Agreement (DTAA) between Singapore and India against taxes paid in Singapore.

I am an Indian resident and I work on contract basis. The company that has recruited me is based in the UK and they are paying me in British pounds (tax-free). The company has a branch in Bangladesh, which is where I will work from on a work permit. The nature of my job is such that I work for about six months and am off for six. But if I get extra work there, I will work in Bangladesh beyond six months. The salary is credited to my Indian bank account. Should I convert it into a non-resident Indian (NRI) account or let it be? Also, do I need to pay tax in India as I will be abroad for more than six months?

—Arjun Pusloori

The income received in the Indian bank account will be taxable in India irrespective of your residential status in India. As the income is sourced from Bangladesh, it may be taxable in Bangladesh also. In case of double taxation, you may claim foreign tax credit on the doubly taxed income based on DTAA between Bangladesh and India against India income-tax for taxes paid in Bangladesh. As you are an Indian resident, you may not be able to open or hold special NRI accounts.

Split-year residency position is not specifically provided under the Indian tax law, but there are certain favourable decisions by Indian courts in this regard

I am not a non-resident Indian (NRI). I have been living in Singapore since November 2015. I have paid taxes in there for November and December 2015. Under the Double Taxation Avoidance Agreement (DTAA), I don’t have to pay taxes for these months in India. But Singapore follows a January-December financial year (FY), and I haven’t yet got my tax receipts for January-March 2016. As the Indian FY is from April to March, how do I avoid double taxation for this period?

—Amit Jakhar

Taxability in India depends on source of income and residential status. Residential status is determined on the basis of physical presence of an individual in India during the relevant FY and the last 10 years. And Indian citizen leaving India for taking up employment abroad may qualify as an NRI if he has spent less than 182 days in India during the relevant FY. But as you started your overseas assignment in November 2015, you may qualify as a tax resident of India for FY16, assuming you had stayed in India for at least 182 days in FY16. A resident individual can qualify as a resident and ordinarily resident (ROR) of India in case he satisfies these conditions: the individual qualifies as a resident of India in at least two FYs out of the 10 FYs preceding the relevant FY, and stay in India, during 7 FYs preceding the relevant FY, is 730 days or more. If both the above mentioned additional conditions are satisfied, you are most likely to qualify as an ROR for FY16 and would thus be taxable in India on your global income, including income (assuming salary) earned in Singapore.

For determining any benefit available under the DTAA, you would first have to determine your residency as per Article 4 of the applicable DTAA, which is dependent on your residential status in Singapore and other personal factors. Typically, in case you qualify as a treaty resident of India, your Singapore-sourced salary income would be taxable in India. In a situation where you qualify as a treaty resident of Singapore, you may be exempted in India on your Singapore-sourced income, subject to the provisions of the DTAA.

Also, you would be required to obtain a tax residency certificate from the Singapore tax authorities (for the period when you qualified as a treaty resident of Singapore), as the same can be requested from you by the Indian tax authorities. Also, split-year residency position is not specifically provided under the Indian tax law, but there are certain favourable decisions by Indian courts in this regard. Tax return should be filed in India, if any benefit is claimed under DTAA.

I have become a UK citizen now and am staying in London. Can I continue Public Provident Fund’s (PPF’s) till maturity? Can I continue investing in my PPF account even if I come back and stay in India on a British passport?

—Salil Gumaste

Under the PPF scheme, NRIs are not eligible to open a PPF account. However, a person residing in India who already has a PPF account and subsequently becomes an NRI may continue to deposit funds into his existing PPF account. So, you can continue contributing to your existing PPF account, while you are staying in London and also on returning to India on a British passport till its maturity only. On maturity, you cannot remit proceeds of PPF withdrawal out of India. But if the proceeds are credited in an NRO account, balance in the account can be repatriated abroad up to $1 million per financial year.

I am a non-resident Indian (NRI) living abroad for the past 10 years. If I remit money to a bank account in India, do I need to pay tax on the interest earned? If yes, how do I pay for the same? I have a Permanent Account Number (PAN) and proof of residence abroad.

—Rohan Monteiro

Any income earned or received in India is taxable in India, including interest earned on the amount kept in bank accounts here. But there are certain exemptions available under the tax laws:

1) Interest earned on non-resident external (NRE) rupee account (savings or fixed deposit) is exempt from tax if you qualify as a person resident outside India under the exchange control law.

2) Interest earned on the deposit in foreign currency non-resident (FCNR) account is tax exempt if you qualify as a non-resident or not ordinarily resident in India under the India income-tax law.

3) Interest earned on non-resident ordinary (NRO) rupee account (savings or fixed) is fully taxable. A deduction till Rs.10,000 may be claimed for interest earned on savings account while filing the tax return in India. Interest is taxable at progressive rates ranging from 10% to 30% (excluding surcharge and education cess). The maximum marginal rate is 35.535%. You are required to file an income-tax return and pay taxes in India only if your total taxable income exceeds Rs.2.5 lakh. We would recommend to check the type of account you hold in India to determine the taxability of the interest income. You may pay the applicable taxes online at https://www.tin-nsdl.com/